The Causes and Effects of Foreclosure
Foreclosures are happening at record rates in America. Unfortunately, many homeowners have already experienced a foreclosure and many others face the grim reality that they can lose their home. Understandably, this is a stressful and disheartening experience.
Foreclosure is the last rung on the ladder. It is not a good thing for you or for your lender. Foreclosure is a complicated process that involves many legal and tax issues. It is important for you to understand the types of foreclosure, how the process works, and how it can affect you.
Causes of Foreclosure
The threat of foreclosure occurs when an inability to make the mortgage payment combines with a drop in property values. Many homeowners have been placed under financial stress due to mortgage loans that adjusted to a higher interest rate or a higher monthly payment. When the interest rate or the payment rose, many borrowers found their mortgage payments were no longer affordable. Other homeowners experienced a loss of income, making it impossible to pay the monthly mortgage payment.
A home mortgage foreclosure is the legal process through which your mortgage lender moves to take your home away from you and selling it to satisfy your unpaid mortgage. Foreclosure is almost always the result of a default on monthly payments.
Your mortgage contract should state exactly how many payments you can miss before a Notice of Default is filed against you and the foreclosure can proceed. As a general guideline, it may take 90-150 days, but could be less in some states. It is important for you to keep in mind your lender very likely will not accept a partial payment on any of your mortgage monthly payments. Unlike a credit card, you cannot mail in a portion of your payment and remain in good standing. Mortgage payments are all or nothing. This also means that if you miss one payment, the next month you have to pay the current month and all arrears to catch up!
At the time foreclosure procedures begin, your lender will file a Notice of Default against you. This notice is recorded at the county recorder’s office in the county where your home is located. You will receive a copy of the notice, usually by Certified Mail. Read the notice carefully. Consider speaking with an experienced attorney if you receive a Notice of Default. It may specify a timeframe in which you are required to respond, if you wish to head off the foreclosure, or other details that a professional will help you understand.
There are two types of foreclosure: judicial and non-judicial foreclosure.
Some states require a judicial foreclosure. A judicial foreclosure is a court-ordered, public legal process, the rules of which are set forth in state law. Judicial foreclosure laws vary from state to state. The foreclosure moves, sometimes very slowly, through the civil court system, similar to a lawsuit. Some jurisdictions are swamped with foreclosures, which increases the time it takes your lender to finalize a foreclosure against you. In states using a judicial foreclosure process, your lender does not have a forced power of sale clause, which means that lender must use the state's court system to foreclose.
A non-judicial foreclosure happens outside of court, using a procedure specified both by state law and your loan contract. If your loan terms specify that a foreclosure can take place without the need to go through the court system, then your lender can start the foreclosure process in 60-90 days. In that case, you have a fixed period of time, which varies state-by-state, to either sell the home or to negotiate another solution.
In both judicial foreclosure states and non-judicial foreclosure states, if you do not come to an acceptable accommodation with your lender, your lender then can initiate eviction proceedings, kick you out of your home, and auction it to the highest bidder.
You may find it difficult to work things out with your lender, once the situation has reached the level of foreclosure proceedings. Still, it can be possible. If someone can help you financially or if you have a valuable asset to sell, you can stop the foreclosure by paying back all arrears on your mortgage and any foreclosure fees, or required tax or insurance payments.
Forfeiting your home can be very hard emotionally. It also requires you to move and change your day-to-day life. You may want to do whatever you can to stay in your home for as long as possible. If there is no feasible way to stop foreclosure proceedings by catching up on your arrears, it makes sense for you to consider filing for bankruptcy.
A chapter 7 bankruptcy, which discharges certain debt obligations, will put the foreclosure on hold. Because a chapter 7 procedure usually only lasts a number of months, it is only a temporary fix. A chapter 13 bankruptcy, which re-organizes your debts, working out repayment terms between you and your creditors may be a more effective solution. Chapter 13 proceedings have payment plans that last as long as 5 years. Once you are under the supervision of the bankruptcy court, your lender needs permission from the court in order to move the foreclosure forward. The level of protection that bankruptcy provides can vary from state to state. Consult with an experienced bankruptcy attorney to learn more about this option.
After a foreclosure takes place, it is possible that you may be left with another problem. If your home sells for less than you owe, you may be financially responsible for the deficiency balance, which is the difference between what you owe and what the lender received in the sale of the home. Learn more about deficiency balances in the next article in this section.